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A colleague of mine at CMC is valiantly continuing his crusade against the notion of public goods (A public good is not rival in consumption; my using it does not diminish your use of the good and not excludable). My colleague has two issues. First, he has never come across a good that fits the description well enough to deserve the label and second, almost any discussion of public goods inevitably leads to a discussion of the need for government provision. I find his argument persuasive. It doesn’t take long in government to hear about countless public goods crying out for government provision.

Thus it is with some trepidation that I mention a candidate for the textbook public good. The Global Positioning System, GPS, which provides location information for both military and civilian uses, is currently provided by the US government at no direct cost to users. GPS was constructed to be non-rival and non-excludable. The way the GPS system works is that a series of signals allow a receiver to triangulate the user’s location without the user needing to communicate back to the satellite. The military nature of the system means that users do not actually want to be found; hence GPS is designed for passive use only. It also makes it very difficult to charge end users for using the signals.

The US government has picked up the cost of providing the system and, according to the Economist

“…after spending $20 billion, the Pentagon has built a global system that is a key ingredient of NATO defense. But it is also an essential prop to countless civil applications: for every military user, there are now 100 civilian users. GPS provides not only satellite-navigation systems in cars and boats; it is used by internet service providers, by banks and by surveyors. One day it might be used by air traffic control systems to permit “free flight”, in which pilots of commercial aircraft find their own route and stay clear of other aircraft, without the cumbersome business of radio telephone contact with controllers on the ground.”

So is this a lighthouse or not? The debate is currently more than academic. The Economist details the European Union’s solution to the provision of position navigation and timing services. The EU’s proposed system,

“…will be in part a commercial system. A concessionaire will get the right to operate the system for a fixed period in return for plunking down two-thirds of the deployment costs–around $2.8 billion.”

I look forward to the day when a Principles of Economics textbook uses GPS as an example of public good. Whether Pigou or Coase wins this one I cannot predict.

In the weeks leading up to Google’s IPO, few people had anything good to say about the company or its decision to go public using a modified Dutch auction. (Here’s one notable exception.) But now we’re seeing a welcome backlash to the anti-Google backlash, with a host of articles arguing that, glitches notwithstanding, the IPO worked. (My take is here, but unfortunately you need to subscribe to the Financial Times to read it.)

Most discussions of the IPO have focused, appropriately, on the fact that Google maximized the amount of money it raised by reducing the commissions it paid its investment bankers and by getting itself a fairer price than it would have under the traditional system. (Even though Google’s price did jump 18% on the first day, that was a relatively reasonable discount given all the fear and uncertainty Wall Street had tried to sow about the company and the offering.) As Alex wrote last week, the true test of the success of an IPO is the “cost per dollar of raised funds,” and by that standard Google did well.

But the offering was also a success for another reason, which is that it forced institutional investors to compete, for once, on a level playing field. The problem with the current IPO system isn’t just that companies end up leaving billions of dollars on the table when they go public, but that select mutual-fund and hedge-fund managers (as well as well-connected individuals) are handed what amounts to free money. In a traditional IPO, the investment bank underwriting the offering controls the allocation of shares. In the late 1990s in particular, that allocation process became a way of doling out favors and securing future business. For instance, if you were a mutual-fund manager who funneled a lot of trades through an investment bank — or who agreed to do so — then you were more likely to get a hefty allocation of IPO shares.

This made money managers look a lot smarter than they were — even if you set the bubble aside, there are lots of fund managers whose returns from the late nineties need an asterisk next to them — and it wrecked the price-setting process, since there was no real attempt to let the price reflect the real demand for a stock. It also sabotaged one of the best things about capital markets, which is that in theory they aggregate the opinions of anyone with enough capital and enough risk tolerance to participate, and not just the opinions of those with the right connections. (There should be no velvet ropes in capital markets: if you can pay, you can play.) Google turned all this around: the only way to get shares in the Dutch auction was to do the valuation work and make a reasonable bid. The traditional IPO relies on the power of cronyism. Google’s IPO, flawed as it was, relied on the power of markets. Bad for the Street, good for everyone else.

At this point, it seems clear that Venezuelan president Hugo Chavez won a definitive victory in the recall referendum that the country held a week ago Sunday. The opposition, though, continues to insist that there was massive fraud. There doesn’t seem to be any proof of this, but one piece of evidence that Chavez’s opponents seized on almost immediately was the curious fact that at hundreds of polling stations around the country more than one voting machine recorded the exact same number of “yes” votes (“yes” was a vote for Chavez’s removal). For instance, the Wall Street Journal reported that at one polling station in Bolivar, two machines each recorded 153 “yes” votes while recording 215 and 237 “no” votes.

The opposition argued that this was proof that the number of “yes” votes had been “capped,” so that after a certain number of votes had been recorded, every additional “yes” vote was changed to a “no” vote instead. (Venezuela uses computerized touch-screen voting machines.) And at first glance, this might seem suspicious. But at second glance, it seems like a simple product of chance, as the Journal pointed out:

Aviel Rubin, a computer-science professor at Johns Hopkins University, said he calculated odds of roughly one in 17 that two of three computers at a voting table would have identical results. That compares to about one in 15 that so far have shown similar results in Venezuela’s referendum.

In other words, with twelve thousand voting “tables,” many with multiple machines, it was inevitable that some would end up with matching scores. (It’s similar to the fact that if there are 23 people in a room, the chances are 50-50 that two of them have the same birthday.) Not surprisingly, then, when international observers audited a sample of the results, they found that while there were 402 tables with matching anti-Chavez votes, there were 311 tables with matching pro-Chavez votes, too. What seemed to be proof of fraud was most likely just a statistical artifact.

This is a classic example of what Nassim Taleb calls being “fooled by randomness,” in his intriguing book of the same name. We think that randomness means there will be no clusters or sequences of similar behavior, and therefore when we see them we assume they’re evidence of some hidden pattern. (You can see this in the way people interpret everything from clusters of cancer cases to hitting streaks in baseball.) But they’re really just evidence of the numbers working themselves out.